Calculating Overtime Pay: Often Not Such a Simple Proposition
With the deadline for the new overtime rules rapidly approaching – they go into effect December 1 – many employers are looking at converting salaried/exempt employees to hourly in order to stay in compliance with the new, higher pay threshold of $47,476 a year. What they may not know, however, is that calculating hourly pay and overtime, and staying compliant with the law, is not as easy as they may think it is.
To be sure, it involves more than simply deciding what an employee’s hourly rate will be and then multiplying that by 1.5 for any overtime hours worked. Rather, in many cases it will involve further calculations based on what actually counts as hours worked, what the hourly rate actually is (in the government’s view), and what must be included in overtime calculations.
If you are new to paying hourly wages, or if you haven’t reviewed the regulations in some time, then here are some important considerations:
It’s a given that time in the office during the work day is considered working time, but compensable time also includes when employees voluntarily come in early and when they check email after hours at home. And the U.S. Department of Labor views other activities as hours worked, even though they may not “feel” like work, including seemingly insignificant or incidental time such as on-call time, “waiting” time, time spent at trainings, travel time and even some break periods. On top of this, the time paid to an employee in these scenarios does indeed count when determining if overtime is due. So now would be a good time to familiarize yourself with what is considered compensable time. The Department of Labor’s Fact Sheet #22: Hours Worked Under the Fair Labor Standards Act (FLSA) is a great reference and is searchable online.
Once you know what is considered compensable time in order to calculate hours worked, overtime is simply “time-and-a-half” for any hours over 40, right? That’s a fairly safe assumption if an employee has only one rate of pay, does not receive bonuses or any other special earnings, and does not live in a state with more stringent overtime requirements, such as California, Alaska, Nevada and Colorado. However, many employers don’t realize that when calculating “time-and-a-half” the Department of Labor instructs them not to base it on the employee’s hourly rate but, instead, on the employee’s “regular rate of pay.” This includes the employee’s base hourly rate plus any commissions, nondiscretionary bonuses, shift and other differentials. In other words, amounts paid to an employee that are guaranteed/promised/expected based on hours worked, productivity, quality or quantity of work, and other non-discretionary criteria generally must be included in overtime calculations.
The formula for regular rate of pay is really not that complex. Think of it simply as adding up the total calculable earnings for the week – hourly earnings plus any bonuses or additions – and then dividing the sum by total hours worked. Example:
Employee makes $10/hour. This week, he worked 43 hours and earned a $50 production bonus.
To calculate total straight time, you need to add non-discretionary income to hourly rate:
43 hours x $10 $430 (Straight Time)
Production bonus + $50 (Weekly Bonus)
Total regular earnings $480 (Total Straight Time)
To calculate the “Regular Rate of Pay” on which to base overtime, you divide Total Straight time by total hours:
$480 Total Straight Time ÷ 43 hours $11.16 (Regular Rate)
Overtime rate is based on this “Regular Rate”:
$11.16 (Regular Rate) x ½ $5.58 (Half-Time Premium)
$11.16 (Regular Rate) + $5.58 (Half Time Premium) $16.74 (Overtime Rate)
To calculate total earnings, you sum straight time hours at the “Regular Rate” with overtime earnings:
40 (Straight Time Hours) x $11.16 (Regular Rate) $446.40 (Straight Time Earnings)
3 (Overtime Hours) x $16.74 (Overtime Rate) $50.22 (Overtime Earnings)
Total Earnings $496.62
While this calculation may seem easy enough if includable bonus amounts can be pinpointed to a particular week, what happens if the amounts cover more than a single week? Here’s where it gets a bit more complex. Department of Labor regulations require that the bonus earnings be allocated to the week in which they were actually earned. This means that if these amounts are paid, say, quarterly, then once they are calculated they must be “assigned” to the week(s) earned in the quarter; and any week in which the employee had overtime must be recalculated retroactively to determine what the “half time” rate of time-and-a-half should have been for that week.
If it is not possible to allocate the additional earnings to individual weeks, the Department of Labor permits an equitable approach be used, such as applying the amounts equally across the entire period the additional earnings covered. This is true no matter what the timeframe is, so if certain bonuses are calculated only at the end of the year based on the entire year of performance, the Department of Labor expects that an employer will go back and recalculate overtime for the entire year. Additional examples by the Department of Labor that illustrate these scenarios can be found at https://www.dol.gov/whd/StateandLocalGovernment/media/OT%20Examples%20final.htm.
While these aspects of the law may not be familiar to many employers, these are not new requirements, and enforcement by the Department of Labor is just as rigorous as more commonly understood provisions of the law. And enforcement is expected to increase as the volume of hourly employees grows in response to the new overtime rules. So, as you map out your company’s plans to comply with the revised regulations and the higher threshold for exempting employees from overtime, make sure you consider the full range of rules for calculating your hourly employees’ rate of pay. It may not be as simple as you think!
By Charlotte Jensen, VP of Compliance – Affinity HR Group, Inc.